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The worry for long term investors, especially those who have a shorter time window before they need to start drawing on their nest egg is, what will happen to my investments as we go through these choppy waters.

We return to check on the permanent portfolio and its variants which was first proposed by Harry Browne in his Fail-Safe Investing book and has delivered stellar results for the past decade.

The simple version is:

  • 25% in U.S. stocks, to provide a strong return during times of prosperity. For this portion of the portfolio, Browne recommends a basic S&P 500 index fund such as VFINX.
  • 25% in long-term U.S. Treasury bonds for deflation protection.
  • 25% in cash in order to hedge against periods of “tight money” or recession. In this case, “cash” means a money-market fund.
  • 25% in precious metals (gold, specifically) in order to provide protection during periods of inflation.

There is a mutual fund (PRPFX), managed by Michael J. Cuggino which is more sophisticated and we have cloned this with Permanent Portfolio ETF Version based on this recent report.

Portfolio Structure

  • Gold (NYSEARCA:GLD) 20%
  • Silver (NYSEARCA:SLV) 5%
  • Swiss Franc Assets (NYSEARCA:FXF) 10%
  • U.S. and Foreign Real Estate (NYSEARCA:IYR) (5%) and Natural Resource Stocks (NYSEARCA:IGE) (10%) (15% based on report)
  • Aggressive Growth Stocks (NYSEARCA:VTI) 15%
  • U.S. Treasury Bills (NYSEARCA:LQD)(5%), Bonds and Other Dollar Assets 35% (15% (NYSEARCA:TLT), 15% (NYSEARCA:SHY))

We have added into the mix a buy and hold strategy using the Permanent Portfolio ETF funds. This portfolio rebalances monthly within the four major asset classes: US Equities (VTI, IGE), Commodities (GLD, SLV), REITs (IYR), Fixed Income (LQD, TLT, SHY).

When we looked at this a month ago, we had the following performance

June Portfolio Performance Comparison

Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
PRPFX 22% 260% 9% 64% 10% 71%
Permanent Portfolio ETF Plan Strategic Asset Allocation Risk Profile 35 35% 251% 11% 56% 11% 58%
Permanent Portfolio ETF Version 23% 279% 9% 74%
Harry Browne Permanent Portfolio 11% 191% 7% 84% 8% 82

July Portfolio Performance Comparison

Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
PRPFX 23% 278% 10% 66% 10% 74%
Permanent Portfolio Fund PRPFX ETF Plan Strategic Asset Allocation Risk Profile 35 35% 275% 13% 65% 10% 58%
Permanent Portfolio ETF Version 24% 292% 10% 79% 10% 83%
Harry Browne Permanent Portfolio 12% 208% 8% 87% 8% 88%

We have already remarked that the permanent portfolio in all its variants has done a stellar job for a long period of time. We can see that diversifying each of the asset classes increases the returns.

We want to look at how it's navigating today's conditions to see whether this is worth considering as a safe harbor. To aid this comparison, we have added VTI as a proxy for the US stock market.

Three Month Chart

[Click to enlarge]

The first thing we note is that the stock market has ended the three month window pretty much where it started despite the gyrations and the future looks pretty uncertain as well.

The permanent portfolio strategy continues its uncanny balance as gold, silver and the Swiss franc help offset downward pressure elsewhere.

  • The simple portfolio, while lower in overall returns, is the most stable through this period and looks stable.
  • The ETF version of PRPFX is ahead of PRPFX -- if they are essentially the same, the ETF version will win out because of lower expenses and it looks to be a better bet given that the mutual fund stays true to the original portfolio goals
  • The SAA version of the portfolio which allows for fund rotation based on momentum had a spike in May but dipped in June -- it has recovered but the volatility is a concern in this environment. This is reflected in the lower Sharpe ratio -- indicating that, although the returns are higher, so is the volatility associated with the portfolio.

We continue to see the permanent portfolio delivering in difficult circumstances with the different asset classes helping to smooth out the volatility that equities face. With a range of alternatives with Mutual Funds and ETFs, this continues to be a solid player in the long term investing space.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Source: July Report on the Permanent Portfolio Shows Steady Progress